Free rent, or rent abatement, is common in many commercial office leasing and retail property transactions. Landlords offer free rent to entice tenants to sign leases and to assist with economic hardships. And it’s almost exactly what it sounds like: rent that you don’t have to pay, but how does it work? Who really benefits? Are there pitfalls to consider?
The Perks Of Free Rent
The benefits of free rent for tenants includes advantages beyond monetary savings. Not only does it provide relief on rental expenses but also contributes to your overall satisfaction. By reducing financial burdens, you can redirect resources towards other business or personal needs, contributing to financial stability and growth. Free rent expands your options by making previously unaffordable spaces accessible.
How Free Rent Can Make a Landlords’ Property More Profitable
Why might a landlord choose to give you free rent? Landlords might offer free rent as a reason to choose their property over other properties. A landlord might also offer you free rent to attract your business while still maintaining their cash flow and business viability. This can show a property as being occupied to draw other prospective tenants which makes the property more competitive. Free rent also allows a landlord to potentially negotiate additional requirements like lease length and operating expense reimbursements.
The Risks Of Free Rent
Are there risks to taking free rent (rent abatement)? Certainly. In spite of the name, free rent is not necessarily free. When offering a rent abatement, property owners ensure discounts won’t apply to your other expenses such as: Common Area Maintenance (CAM); property taxes; maintenance fees and insurance. Free rent is not always financially advantageous for tenants. Landlords might ensure your responsibility for your pro rata share of the operating cost, even with a gross lease. This means you might have to pay for operating expenses and other costs, even for the period covered by free rent.
Tenants should be aware of unexpected costs that the landlord may pass on to them. It’s important to avoid being caught off guard by a surprise bill for CAM charges at the end of the year.
How It Works
Gross Lease Versus Net Lease
A gross lease and a net lease are two different lease structure landlords can use for their tenants. Gross leases often include all operating expenses in the rent, so you just pay one lump sum per month. A net lease usually doesn’t include operating expenses as part of the rent agreement, so the base rent is lower, but you are expected to pay the additional operating expenses separately during the free rent period.
When do tenants get free rent?
If a landlord offers you free rent, they might be charging you a higher rent than the market value to offset the initial discount. They also might use free rent to extend the length of your lease. For example, they might structure your lease with the terms that every free month of rent you accept extends the lease by a month. If you had a five-year lease under these terms and accepted three months of free rent, your lease would then be 5 years and 3 months. These terms help landlords recover income over the life of the agreement.
Free Rent is a Tool, Not a Free Ride
Free rent can be a negotiating point and a benefit, but you want to know the risks. You don’t want to receive an unexpected bill or unknowingly agree to a lease extension. Before you accept free rent, make sure you have a clear and thorough understanding of what you are signing up for.
